China’s Credit Expansion Slows as Li Curbs Shadow Banking

China’s broadest measure of new
credit fell to a 21-month low as Premier Li Keqiang extended a
campaign to curb a record expansion of lending that’s added
dangers to the nation’s financial system.

Aggregate financing was 808.8 billion yuan ($132 billion),
the People’s Bank of China said in Beijing yesterday, compared
with the 925 billion yuan median estimate of analysts surveyed
by Bloomberg News. New yuan loans exceeded forecasts and
accounted for about 87 percent of the total, the most since
September 2011. M2 money supply growth unexpectedly accelerated
to 14.5 percent.

Policy makers are persisting with a crackdown on shadow
banking following a government-engineered cash crunch in June
even after a two-quarter economic slowdown. A report yesterday
showing faster gains in industrial output added to evidence that
growth is stabilizing after data Aug. 8 showed exports rebounded
more than estimated.

“Today’s overall outcome is a good one: Credit growth is
slowing but real activity, including domestic demand and
exports, are picking up,” Wang Tao, chief China economist at
UBS AG in Hong Kong, said yesterday.

While reduced credit may make it tougher for Li to achieve
this year’s 7.5 percent growth target, it would ease dangers of
a financial crisis. China’s lending surge in the past five years
is of a magnitude that tipped Asian nations into crisis in the
late 1990s, according to Goldman Sachs Group Inc., and the State
Council last month ordered the first nationwide audit of
government debt in two years.

Loan Estimates

New yuan loans were 699.9 billion yuan in July, compared
with the 640 billion yuan median analyst estimate and 540
billion yuan a year earlier. Aggregate financing, which includes
bond and equity sales, entrusted loans and bankers’ acceptance
bills, compared with 1.04 trillion yuan in June and 1.05
trillion yuan a year ago.

M2 growth compared with the median economist estimate of
13.9 percent and 14 percent in June.

“The implication is that money is returning to the formal
banking system’s on-balance-sheet activities,” said Yao Wei,
China economist at Societe Generale SA in Hong Kong.

The cash crunch in June helped squeeze speculative lending
and rein in what Vice Finance Minister Zhu Guangyao said were
“prominent” shadow-banking risks.

The seven-day repurchase rate, which rose to a record 11.62
percent in June, has since dropped to 3.66 percent as the
central bank added funds. The PBOC injected a net 20 billion
yuan into the financial system this week, after 136 billion yuan
in the five days ended Aug. 2.

Negative Impact

“We do see some negative impact of the June interbank
liquidity crunch on credit availability for the real economy as
evidenced by the sharp fall in corporate bond issuance and
bills,” Lu Ting, head of Greater China economics at Bank of
America Corp. in Hong Kong, said in a note. “But we believe the
impact is muted as Premier Li Keqiang’s team has taken decisive
measures to calm the interbank market and to support growth.”

China’s industrial output rose more than estimated in July,
adding to signs the economy is stabilizing after unexpectedly
strong trade figures.

Factory production increased 9.7 percent from a year
earlier, the National Bureau of Statistics said yesterday.
Retail sales advanced 13.2 percent while fixed-asset investment
excluding rural households grew 20.1 percent in the first seven
months of the year.

Stocks Rise

The Shanghai Composite Index (SHCOMP) of stocks reversed losses
after the industrial-output report, rising 0.4 percent at the
close.

The gain in factory output was the most since December
excluding distortions from the Chinese New Year holiday in
January and February. The median estimate of 47 economists
surveyed by Bloomberg News was for growth of 8.9 percent,
unchanged from June’s rate.

“The data confirms that China has bottomed out,” Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong,
said in a note. Output is picking up on an anticipated rebound
in demand due to government stimulus and recent reductions in
inventories, he said.

Retail Sales

Retail sales compared with the median projection for a 13.5
percent advance and a 13.3 percent increase the previous month.
The median estimate for fixed-asset investment was a 20 percent
increase after a 20.1 percent gain in the first half.

China’s passenger-vehicle sales rose 10.5 percent in July
as automakers increased production and dealerships stepped up
discounts to clear inventory, figures from the state-backed
China Association of Automobile Manufacturers showed yesterday.
Wholesale deliveries of 1.24 million units topped the median
estimate of 1.22 million from six analysts surveyed by Bloomberg
News.